The Ball and Supply Chain(puri.sm) |
The Ball and Supply Chain(puri.sm) |
If some other country starts to develop an in-house supply chain for some specific item, exports for that specific item are turned back on and possibly sold at a loss until the threat ceases. That's what happened with rare earths. Remember rare earth shortages. China cranked up the price, Molycorp got the Mountain Pass CA mine going again, China dropped the price, Molycorp went bankrupt. Same strategy Amazon uses with Amazon Basics.[1]
This is an explicit national strategy of the PRC. There's no secret about it.
[1] https://www.mining.com/caught-between-rare-earths-and-chines...
The US has been pushing all its externalities onto 3rd world countries for decades so it can enjoy a high standard of living while pretending that it doesn't have an environmental cost. China & Africa have endured some very dodgy waterways and extremely questionable air so that America gets iPhones and other electronic gizmos.
Several American administrations and a couple of powerful political lobby groups have been everything short of openly hostile to the mining industry. Although the worst of the ire was directed at coal, the thumbscrew tightening approach to regulation affected everyone.
China's strategy is to get a lock on rare earth production. The US's strategy has been for someone else to have a lock on rare earth production. The States has not been a prime destination for mining investment in the last 30 years, and their market for consumption hasn't been growing all that much. The only thing in their favour is that with the rule of law the mine probably won't be nationalised.
China isn't acting unilaterally here. It is illegal in the US to do what China does to get ahead.
Not quite though. The US's strategy has been for someone else to do the mining. That strategy works pretty well when it's two dozen other countries in competition with one another, because then you're not reliant on any one of them and there is no single point of failure.
The failure is in failing to prevent it from all being consolidated into a single authoritarian country.
Notice that this is not a new thing. It's the classic strategy used by 19th century robber barons before there were antitrust laws. Have a large conglomerate, if anyone tries to compete with you in any industry, use profits from other markets to sell below cost until they go out of business and you have a monopoly again.
The question now is how to effectively enforce "antitrust laws" against a government.
I don’t see a solution in sight.
If it's important enough, then it's worth negotiating the pitfalls.
Imagine telling Huawei to stop selling a massively profitable product overseas for example.
I don't really see this strategy being carried out other than in the most general sense. Where are these supply chains popping up and getting swamped?
And remember, this is very costly to China as well - selling at a loss, so they can then sell 'very cheaply'?
The problem with the above thesis is that all of this is a 'secondary economy strategy' i.e. it's good for catching up, it's not very good for surpassing. You need domestic consumption, and the ability to export goods at the highest end of the value chain, both things China will struggle with.
Or you could ban all trade with China.
Trying to convince the US government to do something about this seems quite difficult. I feel like the easier tactic perhaps is trying to get international trade to be less dollar-oriented. Indirect doesn't necessarily mean harder.
China needs big intl businesses. The Chinese domestic market is not big enough to support their current pace of economic growth, and the government relies on that growth for social stability.
Though I know it is a bit more complicated with refineries etc...
[1] https://www.cfr.org/backgrounder/state-us-strategic-stockpil...
For the SmallCo vs Amazon example: either superior branding&marketing or protection via patents. If you try to differentiate through pricing, Amazon can sell at a loss for too long for you to survive.
But tbh in either case it is like a third world dictator asking "how can I win" when the US is already invading. You can't, the best option now is to cut losses and retreat so you at least stay alive.
Because, if it is on Amazon basic, there is no new intellectual property protecting it, so it should be a commodity that is completely optimized. Companies need to move on and make better things, protect them with IP, and then Amazon can’t just copy it and make it a basic object.
The opinions of free market capitalists aren't in the driver's seat of the US economy. Since the 70s the US has been transitioning to some sort of mixed model.
I feel like this is the manufacturing equivalent of the financial sector shenanigans back in 08.
A bunch of companies increasing profits by baking in risks into the chain, because the risks of your individual providers failing are independent probabilities, until a pandemic closes them all at the same time.
The obvious difference is that the financial sector was (and is) way bigger than manufacturing.
e.g. microcontrols don't require lots of processing power, and if embedded software wasn't complete shit it would be easy to keep portable so there is supply chain flexibility.
If you have a just-in-time manufacturing operation and your suppliers are more powerful than you are, you're very vulnerable.
They provide component-level part risk and sourcing information factoring everything from active litigation against sub-tier suppliers to geopolitical risk affecting associated manufacturing facilities and supply lines. I rarely encounter data as a service in my line of work. I usually think of that as typically market research, so it's been interesting getting a different angle on that.
[1] - https://www.z2data.com/
It's consolidation of manufacturers worldwide and centralization of production in select parts of Asia. Lack of competition, in other words.
Companies think they can save money by outsourcing engineering expertise. They think they can save cost by outsourcing everything to suppliers. So their financials look great, but that's absolutely misleading.
Then you have companies like SpaceX eating everybody's lunches, and to my surprise, still eating everybody's lunches.
The ridiculous part is that this has extended to the point that subcontractors have other subcontractors, that have yet another subcontractor...
If you're in the business and have to acquire components you know with high confidence that component scarcity did not start with the pandemic.
We are now feeling the problems that come with the limits of this kind of global supply chain (which is the outcome of a political-economic project which has been underway, outside the spotlight of mainstream media coverage, for about three decades). The problem and possible solutions are inevitably more political than technical (who gets to decide where things are made, how, and how much is not something the average citizen who has to bear the brunt of the effects has any control over--a political problem).
I also recently learned about how single-use production techniques exacerbated the supply chain fragility, esp. as regards the US covid response. Interesting stuff. Big, long-term problems.
The business consensus for the last 3 decades was to outsource the supply chain to the cheapest bidder. That the cheapest bidder had no environmental regulations was an ignored outcome. That the cheapest bidders were all closely related and existed within a new competing network of suppliers was likewise ignored.
I suspect the lack of direction that's been apparent for the last ~8 years is partially due to a general view that one or more of free-trade, free-enterprise, environmental protection, or national security/international posture needs to change.
The interesting fact about competition on the world market is that the easiest way to compete is by making the private and public sector work together. People complain about China subsidizing exports for unsustainable prices, sometimes below the cost of production, however this is only possible because the government is ensuring there is enough stability in the country for those companies to continue to exist and because the government is actively supporting these growing industries even if there is some inefficiency.
DRC basically has none of that, if anything the private sector may have an unreasonable degree of control over the government but the government has no control over the private sector.
China is past the "catching up stage" in the industrialized areas. Median income in Shenzhen is comparable to US median income. Current policy is to increase domestic consumption and have an internal economy which is less dependent on exports, while still dominating key international markets. This is called "Dual Circulation".
Here's a summary of the 14th Five Year Plan.[1] "President Xi called for building “independent, controllable, secure, and reliable supply chains to ensure industrial and national security with access to at least one alternative source for important products.” President Xi said China should “use existing global dependencies on China as a counterweight to pressures to shift manufacturing out of China” and “use the pull of China’s market to attract global resources and deepen global dependence on China.”"
The "Made in China 2025" plan, issued in 2015, listed 10 sectors where China wanted to be self-sufficient by 2025.
- New information technology
- High-end numerically controlled machine tools and robots
- Aerospace equipment
- Ocean engineering equipment and high-end vessels
- High-end rail transportation equipment
- Energy-saving cars and new energy cars
- Electrical equipment
- Farming machines
- New materials, such as polymers.
- Bio-medicine and high-end medical equipment.
Most of those goals have already been achieved.
Again, none of this is a secret. It's stated policy of the PRC.
However, some are no longer mined in the US, like tin, since 1993.
(For people unfamiliar with "rare earth minerals", they're not rare. But today their mining and processing is mostly done in China.)
The USSR had no decentralized layer of decision making at the firm level, all firms produced according to quotas made by the central government, and were ultimately less efficient than the US's decentralized layer of competing firms. This does not mean that centralized layers aren't necessary. Both the US and the USSR had a layer of centralized decision making at the government level subsidizing key national industries during the cold war. Both kinds of layers are necessary, but after the cold war the US saw that their decentralized layer of firms made them more economically successful than the USSR, thought that was the whole formula, and tossed national economic strategy out the window to let the firms do whatever they liked. Now the pendulum's swinging back to correct this misconception with China growing quickly using a layer of centralized national economic strategy that the US discarded.
a) It's amazing Russia went from just out of feudalism to as industrial as it did.
b) If there even was a mistake, it is probably that more demand and nicely flexible demand (as the consumer economy can provide) would have helped. But that's not about free trade per se.
Pretty sure West-East trade was already pretty limited from both sides, and I don't think there were many intra-USSR limitations to trade. For example, the border between Russia and Ukraine has caused many economic issues in the years since.
This worked when the US and USSR had approximately the same population size and the USSR was trying to keep up with US military spending. Probably not as well when China has three times the population of the US and doesn't care to install the number of troops in Cuba that we pay to maintain in Japan and South Korea.
> And didn't relatively free markets succeed while soviet communism collapsed under its own economic weight?
The USSR and China are both described as "communism" but they're not using the same system at all.
The USSR was a democracy and so its government was plagued by all the corruption and principal agent problems inherent in government spending by a large centralized elected government, except that in their case it was the whole economy.
China is basically operating a country like Rockefeller operated a monopolistic corporation. It's less centrally planned than the USSR. They use internal competition. The principle difference from the US economy is that it's not an elected constitutional government. There is no takings clause, no EPA or FTC, no National Association of Realtors, no free press. They call themselves communists but they're really fascists -- the merger of state and corporate power. What the robber barons would be if they were also kings.
That doesn't collapse like the USSR.
Tariffs and anti foreign investment, just like China. If that's what you want. But there will be consequences, potentially violent ones.
Like ya, it'd be a lot of work (probably take years!) to get these deals going, but let's not lie to ourselves about what these subsidies are about - they're about trying to setup a more or less sustainable system in important industries that is supposed to last for decades. After years of "paperwork" it'll take years (maybe over a decade!) to actually come up to steam in production.
At least for the USMCA and EU, I think a lot of American interests are more or less aligned with partner interests. The obvious common ground is "let's work out ways to reduce our reliance in certain strategic areas from sources concentrated in China's sphere of influence". I think there's sufficient political AND popular backing of that that something could probably be figured out. Notably this might require that America itself "settle" for bringing back "western manufacturing" not "American manufacturing". That might be the hardest sell in this whole deal.
The only rough patch that I could see would be in autos and aircraft which are both relatively stable industries with a history of comebacks. I would imagine that there would need to be provisions for national protection of these types of industries.
The EU is trying hard to legislate FAANGS for anti-competitive issues and more money.
I don't see a lot of goodwill on these things.
Unless there is a clear and obvious path for some specific kind of industry ... I can see everyone getting along on a specific issue, but I don't see what that is.
What the rare Earth mineral example shows is that China is willing to incur environmental and human rights costs that the West is not, in order to carve out a seat at the table for negotiating future power projection.
>China needs big intl businesses. The Chinese domestic market is not big enough to support their current pace of economic growth, and the government relies on that growth for social stability.
Really not following this point. If anything, this is evidence that elites in the west - who get rich off of the kinds of "market solves everything" solutions you may or may not be alluding to - will continue to ignore the problem as long as the stock market goes up. I also don't understand your point about the size of the domestic market in China. It's well over a billion people. International business looks at those demographics and see nothing but dollar signs. The difference here is that China's government will only let in that business insofar as they see it as enriching their country, and they make this point explicit. Size alone here is an advantage.
So the Chinese government does not hold all the cards in their relationship with foreign investors. They need each other, which creates a balance that they both have to carefully negotiate.
You’re forgetting the time aspect. A government can play a longer game than most private investors.
Markets: 0.25 years
Western govts: 4-5 years
Autocratic regimes: lifetime of dictator
Seeing the results of protests in recent years, this ability seems to be ever increasing.
The “corporate” in Mussolini’s famous quote re: fascism meant something else.